What an Investment Fund, Forced to Take a Big Loss, Said about the Housing Bust in Prime Central London

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Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

“Probably now enduring its most protracted period of price suppression since records began.”

Here is an interesting and colorful tidbit on the housing market in Prime Central London, one of London’s most expensive areas and once the hotbed of London’s breath-taking property bubble, and now a deep morass.

London Central Portfolio Property Fund, a closed-end fund focused on small apartments worth less than £1 million in Prime Central London, sent a letter to its investors on January 21 in which it disclosed that it had to write down the value of its properties by 9.6% over the six-month period ending September 30, 2018. Due to leverage in the fund, the net asset value of the fund dropped by nearly 20% over the six months. This pulled down its net asset value by nearly 25% over the two-year period.

The write-down came about because Al Rayan Bank, which provides financing for the fund, exercised its right to revalue the fund’s portfolio properties, according to a filing with The International Stock Exchange, where the shares trade as London Central Apartments III. The bank instructed Mortlakes Chartered Surveyors to conduct the valuation.

The fund, the letter says, aims “to benefit from attractive rental yields as well as capital value growth.” But that second part didn’t quite pan out.

Some of the letter’s painful and eloquent laments about the debacle — a debacle for investors — playing out in the Prime Central London (PCL) housing market:

“Fundamentally, the dynamics in PCL reported over the last couple of years have regrettably not changed. If anything, they have deteriorated further.”

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“Most investors are aware of the unprecedented difficulties faced by Prime Central London residential over recent years and recognize the remarkably difficult trading conditions that the Fund has had to endure.”

The letter mentions the collapse in share prices over the past four years of two real estate agencies: Foxtons down 87.4%; and Countrywide, the largest agency in the UK with over 10,000 employees down by 98.5% (we covered this fiasco).

“Its difficult to open a paper these days without reading about the parlous state of the residential market in PCL.”

“With such negative news predominating, it is perhaps unsurprising that the number of transactions continues at an all-time low. In the most recent data available from HM Land Registry, year to date sales totaled just 3,671 across the whole of PCL – just 71 per week – and fewer than were seen at the depth of the Global Financial Crisis. While this dynamic is sometimes indicative of a lack of vendors, in the current circumstance, it is largely due to a lack of buyers.”

“50.4% of all current listings in PCL have been on the market for more than 6 months, with 26% still being available after 12 months. This contrasts starkly with ‘normal’ market conditions where the supply-demand imbalance means good properties go under offer in days.”

“The upshot of all of this is that PCL is probably now enduring its most protracted period of price suppression since records began.”

“During the Global Financial Crisis, annualized volumes of sales for PCL (perhaps the best barometer for the market ‘s general health) dipped below 4,500 for just 10 months from January to October 2009. In contrast, the current scenario has seen 23 consecutive months at this level.”

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“Due to the current market conditions, most people with properties listed on the sales market are selling out of necessity. This is therefore reflected in the prices.”

So, the letter explains, the net asset value per share has “materially” declined. But “in light of the dysfunction market detailed above, the performance is not surprising.”

The letter blamed a mix of Brexit, political uncertainty, “two General Elections,” and a slew of new taxes focused on expensive residential properties — such as those in PCL — particularly “the top end buy-to-let and international investor sectors.” And all these are factors that “affect investor confidence.”

But this is what happens at the end of a property bubble: There is pain.

The government imposed the taxes on the market precisely to cool the price increases driven by investors, particularly non-resident foreign investors. Prices rose to the point that a whole generation of young people with even good jobs in London were locked out of the London housing market, as investors piled into housing as if it were just another asset class to be recklessly inflated, thereby creating a now legendary property bubble. But all bubbles end and then deflate, no matter what the perceived reasons, and now these hurting investors are lamenting its end.


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